Question

In: Finance

BQ, Inc., is considering making an offer to purchase iReport Publications. The vice president of finance...

BQ, Inc., is considering making an offer to purchase iReport Publications. The vice president of finance has collected the following information:

BQ iReport
  Price–earnings ratio 13.8 9.8
  Shares outstanding 1,500,000 205,000
  Earnings $ 3,500,000 $ 625,000
  Dividends $ 850,000 $ 300,000

BQ also knows that securities analysts expect the earnings and dividends of iReport to grow at a constant rate of 5 percent each year. BQ management believes that the acquisition of iReport will provide the firm with some economies of scale that will increase this growth rate to 7 percent per year.

a.

What is the value of iReport to BQ? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  Value of iReport $   
b.

What would BQ’s gain be from this acquisition? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  Gain $   
c.

If BQ were to offer $32 in cash for each share of iReport, what would the NPV of the acquisition be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  NPV $   
d.

What’s the most BQ should be willing to pay in cash per share for the stock of iReport? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  Maximum share price $   
e.

If BQ were to offer 260,000 of its shares in exchange for the outstanding stock of iReport, what would the NPV be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  NPV $   
BQ’s outside financial consultants think that the 7 percent growth rate is too optimistic and a 6 percent rate is more realistic.
f-1

What is the value of iReport to BQ now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  Value of iReport $   
f-2

What would BQ’s gain be from this acquisition? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  Gain $   
f-3

If BQ were to offer $32 in cash for each share of iReport, what would the NPV of the acquisition be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  NPV $   
f-4

What’s the most BQ should be willing to pay in cash per share for the stock of iReport? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  Maximum share price $   
f-5

If BQ were to offer 260,000 of its shares in exchange for the outstanding stock of iReport, what would the NPV be? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  NPV $   

Solutions

Expert Solution

A
PE 9.8
Share O/S 205000
Earnings 6,25,000.00
EPS                 3.05
Price of iReport (PE * EPS) $              29.88
B
Growth before Acquisition 5.00%
Growth after Acquisition 7.00%
Gain 2.00%
Earnings of iReport 6,25,000.00
Gain in Earnings (Gain % * Earnings) $      12,500.00
C
Cash Offered per share 32
Current Price per share              29.88
NPV %                 2.12
Total NPV (NPV% * No.of Shares) $ 4,35,000.00
D Earnings 6,25,000.00
Shares Outstanding 205000
EPS                 3.05
EPS growth 7.00%
Next year EPS (EPS1=EPS * (1+G))                 3.26
PE 9.8
Cash per share $ (EPS1* PE)              31.97

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